U.S. Reports Retail Sales Grew Less Than Expected

By LOUIS UCHITELLE

Published: July 14, 2001

New evidence of a weak economy appeared yesterday in the latest reports on retail sales, inflation and consumer confidence, suggesting that a much anticipated upturn will not materialize until the fall, if then.

Consumer spending in particular gave ground, with retail sales growing more slowly in June than most forecasters had expected, the Commerce Department reported. Consumer confidence, on the other hand, rose slightly in the first two weeks of July, but among low-income households who told pollsters that they expected inflation to lose strength in coming months, giving their incomes more purchasing power. One crucial measure of inflation fell in June, for the first time in over two years.

''These numbers suggest that we won't get to noticeable economic growth until the fourth quarter,'' said Richard Berner, chief domestic economist at Morgan Stanley Dean Witter. In his view, a rebound after nearly a year of sluggish economic growth is put off until the fourth quarter -- and the economy will contract this quarter.

The big concern is consumer spending. Most forecasters had expected the rebound to show itself during the summer, with consumers generating most of the upturn. They are still counting on consumers to come through, once rebate checks of up to $600 for married couples, specified in the Bush tax cut, begin to reach people this month. But through June, consumer spending had gradually lost ground.

That was evident in the latest retail sales report. Retail sales, which account for 40 percent of total consumer spending, rose by a less-than-expected 0.2 percent last month, mostly on the strength of fairly brisk vehicles sales, the Commerce Department reported. Excluding vehicles, retail sales declined in June by 0.2 percent.

Whatever the measure, retail sales gave up ground that had been gained in April and May. As a result, economists now estimate that overall consumer spending grew at an annual rate of about 2.5 percent in the second quarter. That was down from 3 percent on average in the two previous quarters, and more than 5 percent a year ago.

''The retail sales report was weaker than we had expected,'' said James Glassman, senior domestic economist at J. P. Morgan Chase. Economists at Chase are among the nation's most optimistic forecasters, and Mr. Glassman added that retail sales are ''not weak enough to dampen expectations that we are going to see a revival of consumer spending.''

Spending depends on consumer confidence and that edged up in July, according to a preliminary reading from the University of Michigan's consumer survey group. Its index of consumer sentiment, which has been gradually rebounding since April, rose to 93.7 from 92.6 in May. The rise was among households with annual incomes of less than $50,000 -- a majority of all households, but the not the biggest spenders.

''They see their incomes purchasing more as inflation weakens in the year ahead, mainly as a result of declining energy prices,'' said Richard Curtin, director of the surveys. ''High-income families, on the other hand, focused on what has happened in the stock market; their wealth shrank'' and so did their confidence.

Inflation did lose strength in June. The Producer Price Index, measuring the cost of goods as they move through the production process, from raw materials to finished goods, fell in June. The index for finished goods -- covering all types of merchandise, including gasoline -- fell by 0.4 percent, the Bureau of Labor Statistics reported. That was the first decline since February 1999, and came mostly as a result of falling energy prices. Excluding energy, the so-called core index rose a scant 0.1 percent, the same as in May. Prices at earlier levels of production -- the cost of steel sold to auto companies, for example -- also fell in June, with or without energy.

The Consumer Price Index for June, a much broader measure covering price changes for services as well as goods, will be released on Wednesday and most forecasters expect only a small rise. That would give the Federal Reserve's policy makers room for another cut in interest rates at their August meeting. It would be the seventh cut this year. The goal is to stimulate consumer spending and business investment, without pushing up the inflation rate.

''Goods prices pose no threat to inflation in the United States now or in the foreseeable future,'' Ian Shepherdson, chief domestic economist at High Frequency Economics, told clients yesterday.

The new reports yesterday were only the latest evidence of persisting economic weakness. Initial claims for unemployment pay jumped in the week ended July 7. Inventories of unsold merchandise have declined more slowly than expected, delaying the day that manufacturers will have to lift production to meet demand. And there were reports last week of weak profits, raising concerns that companies will step up layoffs to cut costs, frightening consumers.

The still unanswered question, said William Dudley, chief domestic economist at Goldman, Sachs, is whether rising layoffs ''will cause consumers to cut spending and generate a full-blown recession.''